ETF Roundup: The SEC Staff Caves to Guggenheim and DWS on Self-Indexing and Transparency
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Wednesday, August 07, 2013

ETF Roundup: The SEC Staff Caves to Guggenheim and DWS on Self-Indexing and Transparency

After two months of regulatory wrangling, the SEC has finally decided to loosen its transparency rules for launching ETFs, a major win for active managers who want to break into the space.

However, allowing firms to launch ETFs on indices managed in-house could put the ETF "brand" at risk, Paul Amery of IndexUniverse writes.

The SEC allowed three applications from DWS Investments [profile], Guggenheim [profile], Sigma and DWS Investments' [profile] Transparent Value to continue through the process without the usual limitations that have been required of fund managers using affiliated indexes, Amery reports. Normally the SEC requires disclosure of underlying index methods.

The Global X Management [profile] Social Media ETF, or the "Facebook ETF," once dismissed as gimmicky, has earned some respect, Bloomberg's Eric Balchunas writes. The ETF rose 16 percent and has been up 37 percent for the year so far, exceeding the 12 percent return for the Technology Select Sector SPDR ETF, Balchunas points out.

The fund was launched in 2011, has a low correlation to the S&P 500 and has holdings in Facebook, Tencent Holdings, Sina Corp., LinkedIn, Yandex NV, Pandora Media, Groupon, Google among others.

The decision contrasts to European regulators' efforts to increase transparency, Amery's sources say. Alex Matturi, head of S&P Dow Jones Indicies is quoted as saying "Relying only on disclosure of the fund holdings defeats the objective of providing transparency, which the ETF is all about."

IndexUniverse's Paul Britt covered ETFs that produce hedge-fundlike returns. The ETFs get long and short exposure to similar securities favored by hedge funds, "free-riding" off hedge funds regulatory disclosures, which provides a problem, Britt writes.

The timing is off, because holdings are published long after hedge funds take positions, and hedge funds don't take positions for very long. These ETFs can look for positions that hedge funds take for longer periods, however, Britt writes.

It is difficult for these "copycats" to say they have a consistent advantage, Britt writes, but some of these ETFs have found good returns, such as Global X Top Guru Holdings, with a 53.4 percent return and the Global X's AlphaClone Alternative Alpha ETF with a 31.5 percent return.

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